1. Bitcoin: Breakthrough or Bubble?
Brian Green

2. What is Bitcoin?
Online Transactions Require(d) a Third Party Intermediary
Paypal, MasterCard, etc.
“Double-Spending Problem”
Bitcoin: A Peer-to-Peer Electronic Cash System
Written under the pen name Satoshi Nakamoto
True identity unknown, but suspected to be Nick Szabo
World’s first completely decentralized currency
Peer-to-Peer Payment system
Can be used pseudonymously
Szabo: “I was trying to mimic as closely as possible in cyberspace the security and trust characteristics of gold, and chief among those is that it doesn’t depend on a trusted central authority.”
Before Bitcoin, electronic transactions always required a trusted third-party intermediary in order to properly function. These names today are obvious – PayPal, Venmo, MasterCard, Google Wallet; all of these are private companies who keep track of the electronic accounts where people keep their money. This is because without such intermediaries, there exists something called “the double spending problem” – because “money” is just “data” electronically, and you can easily copy and paste data online, nobody can be trusted with their own data file. In exchange for this service, Paypal collects a small fee from each transaction.
Bitcoin started in 2008 with a white paper by the pseudonymous author Satoshi Nakamoto, who is widely theorized to be one Nick Szabo, a computer scientist from the University of Washington. Szabo is suspected given several public statements he’d made as well as his work on decentralized digital payments before the formation of Bitcoin.
The purpose of Bitcoin is that it is a “completely decentralized currency” and a peer-to-peer payment system that can be used pseudonymously. According to Szabo…

3. The Blockchain: how does it Work?
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.” – Satoshi Nakamoto, 2008

4. The Blockchain: How Does it Work?
Blockchain: Public, distributed Ledger
New Transactions checked against the blockchain
Verified via cryptographic methods
No central authority charged with creating currency or verifying transactions
Instead, users provide computing power in order to do logging/reconciling of transactions: “Mining”
As more and more bitcoins are created, and the more transactions a bitcoin is used for, the more computing power required.
Hard limit of 21 million bitcoins
To put it in plain english – the Blockchain is a public and distributed ledger containing the entire history of each individual bitcoin, which can be subdivided into various pieces and shares. Every new transaction is checked against this ledger, and verified via cryptographic methods that more properly belong in a computer science course.
There is no central authority charged with creating currency or verifying transactions. Instead, users provide computing power in order to log and reconcile transactions – this is what people are actually doing when they are “mining.” In exchange for solving these cryptographic transactions, they are then rewarded with additional bitcoins.
As more and more bitcoins are created, and the more transactions a bitcoin is used for, the more computing power is required. The Bitcoin system has a hard limit of 21 million bitcoins – but these constraints are not “binding” in the sense that we aren’t anywhere near 21 million bitcoins in circulation.

5. The Blockchain: 1000 years early
This is a Rai Stone, and it is the form of money among the Yapese people of Micronesia. They are enormous, unwieldy, and because they take a massive amount of effort to carve and move, most people don’t bother.
Instead, what people would do is agree that this piece of stone belonged to one individual or to another at any given time. At one point, a ship carrying a particularly enormous specimen was wrecked, and the stone lost forever… and this didn’t matter, the stone money was still good. Just as long as everyone know the history of the stone and who it belonged to.

6. Benefits of Bitcoin Lower Transaction Costs Poverty Alleviant?
Microtransactions
“Cash Discounts” – The Bitcoin Store
Remittances
Poverty Alleviant?
Alternative Currency vs. Capital Controls?
Because there is no third-party intermediary, Bitcoin payments ought to be substantially cheaper and quicker than traditional payment networks, which should allow micropayments and other such innovations to become easier and quicker. Credit Card companies charge merchants for a small percentage of each payment made using Visa or MasterCard or the like – this, among other reasons, is why “cash discounts” exist at many small retail locations.
In 2013, Western Union or MoneyGram charged an average fee of about 9% for international payments; the Bitcoin network’s transaction fees at the time were about 1%.
Because much of the developing world uses mobile banking, Bitcoin might further allow the third world to become part of the global financial system.
Finally, Bitcoin may be used to circumvent frozen capital markets – in 2013, Argentina faced a 25% inflation rate and strict capital controls. Bitcoin therefore could provide a hedge against inflation, a role similar to that of gold.

7. Bitcoin and Energy Prices
Digital-currency mining is highly inefficient due to the need to check transactions against the ledger.
These high-powered computations require electricity to perform
In 2015, the minimum estimate for BitCoin mining was 1.46 terawatt-hours per year: 135,000 US houses
In 2018, Bitcoin mining electricity input is expected to exceed Iceland
Mining is concentrated in China due to electricity subsidies, and colder countries due to heat concerns

8. Bitcoin and Decentralizataion
“If you are OK with 10 or so individuals controlling the currency, then you can design a much better system than Bitcoin.” – Bitcoin wiki
Gini Coefficient of Bitcoin in 2017?
0 = Everyone has the same amount of Bitcoin
1 = 1 Person has all of the Bitcoin
US Gini Coefficient in 2013: .41 (World Bank)
Estimates for Bitcoin taken from the 2017 Blockstack Summit
Mining Bitcoin Estimate: .4
Ownership Estimate, greater than 500K: .65
Exchange Estimate: .83
Maximum Estimate: .915
There does not exist a country (except maybe North Korea) with >.85 Gini
Highest Acc. To World Bank: South Africa in 2011: .634
Source:

9. The Diagram of a Bubble

10. A Bubble?

11. A Bubble?

12. What is the Value-Added by Bitcoin?
What service does Bitcoin provide that is truly new and innovative?
Who uses this service?
“Why do people want bitcoin? For secrecy. […] My feeling is that when you regulate it so that you couldn't engage in money laundering and all these other things, there would be no demand for bitcoin…” – Joseph Stiglitz
“Bitcoin as Crypto-Collectible” – Jon Faust

13. Major Sources
Bitcoin: A Primer for Policy Makers. Mercatus Center at George Mason University:
Original White Paper on Cryptocurrency:
Bitcoin and Energy Prices:
While Visions of Bitcoin Danced in Their Heads. Center for Financial Economics at JHU.
A Happy New Year for Bitcoin? Center for Financial Economics at JHU.